Advice and Resources for the Biotech Industry

Advice and Resources for the Biotech Industry

When you hear the word “blockbuster”, what’s the first thing that comes to your mind?a) A movie that earns hundreds of millions of dollars at the box officeb) A prescription drug that brings in more than $1 billion a year in salesc) A bankrupt chain of video storesd) A large bomb capable of destroying an entire city block

All four of these choices are valid answers, but the focus of this article is on the first two. The parallels between biopharma and Hollywood are strong. Both industries invest huge amounts of money in a large number of projects with the hope that some will turn out to be blockbusters i.e. massive money making machines. Sometimes it works out, but the failure rate is high, with most drugs (and many movies) never recouping their development costs. Both groups also love to develop sequels, which is a simpler strategy than developing riskier independent products that their fickle public may, or may not, embrace.There are many aspects of their businesses that are shared by the pharmaceutical and movie industries. Let’s see how they compare:

Film and Pharma: Both Industries Love BlockbustersThis is the name of the game in both industries. The dictionary defines blockbusters as things that are both extremely popular and achieve enormous sales. Blockbusters keep the organization humming and pay for all of the turkeys that don’t earn back their development costs. In biopharma a blockbuster is a drug that generally brings in over $1B in revenue per year, and a significant number do much, much better than that. The 100 best selling drugs in 2015 each qualified in this category. Finding lists of the world’s top selling pharmaceuticals (ranked by sales or by the number of prescriptions written) is very easy. However, plenty of drugs never recoup their development costs, but finding details on the industries sales dogs is much more challenging. The two worst examples I could find were Alexza’s anti-psychotic drug Adasuve and CTI Biopharma’s non-Hodgkin B-cell lymphoma treatment Pixuvri, each of which only earned a few million dollars in 2015.

Blockbusters in Hollywood don’t generally command such lofty revenue numbers, so a more reasonable definition here would be ticket sales north of around $100M. A small number of movies actually have earned more than $1B in worldwide box office receipts. Not all movies make such large amounts of money, but I was surprised to find a list of recent films that didn’t even earn $500 (no, that’s not a misprint) following their release in movie theaters. Even though some movies cost hundreds of millions of dollars to produce (Star Wars: The Force Awakens reportedly cost $200 million to make), these numbers pale compared to drug development costs. The amount needed to develop a new drug has been pegged in a recent study at $2.6 billion (some suggest a number closer to $5B), although these numbers, like Hollywood accounting figures, have been widely questioned as overblown.

Star Power Shines BrightlyBoth film and pharma industries celebrate their most bankable stars. The Hollywood studios had Bogart and Bacall, Astaire and Rogers, and Abbott and Costello. Big Pharma companies brought us Viagra and Lipitor, Epogen and Neupogen, Crestor and Nexium. Bankable stars are at the heart of both businesses, and you can never have too many of them. What biopharma firm wouldn’t want to share the medicinal equivalent of Metro-Goldwyn-Mayer’s famous pronouncement in the 30’s and 40’s that they had, “more stars than there are in heaven.”

Pharma and Hollywood Plagued by Thefts of Intellectual (and Physical) PropertyBoth industries fight tooth and nail to protect their intellectual property, and both have known significant financial pain from piracy. It’s estimated that piracy costs the movie industry billions of dollars in lost profits each year. Pilfered DVDs of popular movies can be widely found at flea markets around the country, and can be downloaded for free from a number of websites. Pirated movies are unlikely to physically injure you, although the same can’t be said for counterfeit drugs. The pharmaceutical industry suffers from three forms of theft: the actual stealing of legitimate drugs; those who appropriate IP to make copycat versions of these same medicines; and those who sell fake drugs as the real thing. These may be sold on the black market, or may be procured by tapping into legitimate distribution channels where those selling the drugs may, or may not, have knowledge that they are distributing stolen property. Stealing a movie is often as simple as recording it on your cellphone in a theater, while the pilfering of drugs often occurs via capers that themselves would form the basis of a good novel or, indeed, a Hollywood movie. In 2010 five men broke into an Eli Lilly warehouse in Enfield, CT and drove off with some $60-80 million in prescription drugs. The FDA maintains a lengthy list of cargo thefts representing a wide variety of both over-the-counter and prescription medicines. Drug thefts have gotten to be such a recurring issue that in 2013 President Obama signed into law the Drug Quality and Security Act. The legislation was primarily enacted in response not to drug thefts per se, but to a large-scale meningitis outbreak at the New England Compounding Center.

(Nearly) Everybody Loves A Good SequelHollywood loves a sequel. If audiences went gaga over the first movie, it’s a good bet that they’ll be fans of future installments as well (up to a point; many aficionados didn’t see Terminator Genisys). Sequels make it much easier for movie companies to commit the funds needed to make the follow-up films because they know they already have an established audience. Each one of the Star Wars, Harry Potter, Fast and Furious, and Lord of the Rings films brought in enormous box office receipts.

In the land of biopharma, the production of sequels is known as evergreening or, to use the industry preferred term, “lifecycle management.” Take a successful drug, and as the patent nears its expiration date, you pull it off the market and replace it with a version that:(a) Has a slightly altered chemical structure(b) Needs to be taken less frequently(c) Is delivered in a new way(d) Or is combined with other drugs.The goal: create something that will earn you a new patent and extend the time you can sell the drug for a premium price. Consumer advocates decry the practice as an insidious way to maintain monopoly pricing in the absence of true innovation. One example: Pfizer replaced its anti-depressant venlafaxine with an extended release version, and then that drug was replaced by a chemical derivative (desvenlafaxine) that is a synthetic version of the primary active metabolite of venlafaxine that’s produced in the body. Sometimes follow-on drugs are produced to get around contractual obligations. Amgen developed darbepoetin alfa (Aranesp), a slightly modified, longer acting version of its epoetin alfa (Epogen) to get around a marketing agreement they had signed with Johnson and Johnson. When a judge ruled that the new drug was indeed distinct from the old one, Amgen expanded its sales greatly (much to J&J's displeasure) by selling its “new” drug into a previously contractually excluded market.

Consolidation Marks Both IndustriesBoth industries have been undergoing consolidation for decades; it’s the largest, strongest companies that survive when economic times get tough. Buying up rivals that have strong existing franchises is often much easier than coming up with your own new hits. Among the movie studios that have disappeared over the years (their assets acquired by other companies) are such well-known names as MGM, United Artists, Tri-Star Pictures, and RKO.

Pharma, too, has undergone a number of consolidation waves over the past 50 years. Among the companies that have been subsumed into others are Wyeth, Upjohn, Schering, Parke-Davis, Lederle, Imperial Chemical Industries, and Pharmacia. The question of whether this consolidation has been good for the industry is open to debate. Big companies, in order to maintain revenue growth, need to keep producing huge selling drugs, either by developing them organically or by further acquisitions. This process gets to be increasingly challenging as the companies get bigger, and acquisitions, as a result, need to bring in greater and greater revenues for the deals to make financial sense.

Changing Roles for Movie Studios and Drug CompaniesAccording to pharma investor (and former Pfizer CEO) Jeff Kindler, “If you think of Hollywood, the movie business, in the 1930s and '40s, the studios had everybody as an employee of the studio — the crew, the cast, the writers, the directors — and they just cranked out movies,” he said. “Today, the movie business is one in which the movie studios act as syndicators, financiers, commercial-oriented organizations — and they put together every move as a package with people who don’t necessarily work for them.” Pharma is doing the same thing today. Drugs are sourced from small biotechs, and contract research organizations handle much of the clinical load. Basic research programs have been greatly downsized or eliminated at most of the Big Pharma companies. At small biotechs, the “virtual” company model, where nearly every function is farmed out to other companies, has gained popularity among those looking to make a quick buck, not build something for the future.

Worldwide Markets Are Critically ImportantThe U.S. is the top market for both movies and pharmaceuticals, but income derived from overseas markets is critical to both industries. Most U.S-made movies actually earn much more money overseas than they do domestically. Similarly, pharma companies in aggregate make more money on drugs that are sold outside of North America than in. When they realized that they had saturated the U.S. market with their products, film studios and drug companies both pursued aggressive strategies in recent years to expand the sales of their products overseas.

Creative AccountingHollywood has been known for years for the art of creative accounting. The very term “Hollywood accounting” is associated with a wide spectrum of opaque and shady practices whose primary goal is to reduce what companies must pay in profit sharing or royalty agreements. Films that bring in hundreds of millions of dollars in box office revenue often show up on the books as money losers. For example, you might be surprised to learn that many hugely popular movies, including Spider-Man, Forrest Gump, Return of the Jedi, and Harry Potter and the Order of the Phoenix, all “lost” money, as reported on Wikipedia.

Accounting issues don’t often become public in the land of BioPharma, but when they do, the detailed descriptions of greed and mendacity are worthy of, well, a Hollywood movie. Amgen and Johnson & Johnson each accused the other of fudging their numbers when the companies were cross-selling the same drug (erythropoietin) in two separate and distinct markets. According to their agreement, Amgen could sell the drug only in a kidney dialysis setting, while J&J was restricted to selling in the chemotherapy-induced anemia market. The gory details from these pharma sales wars were nicely recounted in Kathleen Sharps exposé Blood Feud: The Man Who Blew the Whistle on One of the Deadliest Prescription Drugs Ever.

Huge Advertising Budgets are the RuleAdvertising budgets are huge for both movies and medicines. Producing a quality product is one thing, but convincing movie goers as well as patients, doctors, and other healthcare providers that you can’t (sometimes literally) live without it costs huge amounts of money. In Hollywood the costs vary widely, but spending two hundred million dollars to promote a hoped-for blockbuster to the masses has become common. This level of spending is chump change in the pharma business, where the companies promote their drugs to two different groups. In 2012 drug companies spent an estimated $24 billion marketing their drugs to health care professionals. In contrast, they only spent $3 billion selling their medicines to consumers. One reason for the discrepancy: direct to consumer prescription drug ads are allowed in only two countries: the United States and New Zealand. Pfizer spent $1.1B on these consumer ads in 2014, more than any other drug company. It sells seven of the top ten most-advertised drugs.Both Pharma and Hollywood Are Industries With Large Distribution NetworksIt’s not enough to have product. You need a way to get your goods out to your customers, whether its via pharmacies or movie theaters. The more multiplexes that show a new film, the higher the possible revenues will be. More seats mean more potential ticket sales. Biopharma distribution networks and agreements can be remarkably complicated for pharmaceuticals, often involving drug management companies and bundling deals (e.g. you get discounts on one drug when you buy sufficient quantities of another).

Product LongevityMany drugs discovered 50, 60, or 70 years ago are still available for purchase. Examples include numerous antibiotics, pain relievers, and anti-inflammatory medicines. Similarly, films made 50, 60, or 70 years ago continue to attract new audiences. Classic films like The Wizard of Oz, Casablanca, and Psycho continue to attract new viewers whether they’re on broadcast TV, sold on DVD, or streamed over the internet.Similarities Don’t Tell the Full StorySo there we have it: the biopharma and film industries share a lot of attributes in their business models. However, they also have some critically important economic differences that, when added to the analysis, will keep us from thinking of them as twin sons of different mothers. Click here to read my follow up article Hollywood and BioPharma: Differentiated by Unique Economic Models to learn why these industries, despite their similarities, actually move to the beat of very different drummers.

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